Israel: Economy shifts into higher gear
August 16, 2017
Israel’s economy shifted into higher gear in the second quarter, expanding 2.7% over the first quarter at a seasonally-adjusted annualized rate (SAAR), after last quarter’s slowdown (Q1: +0.6% quarter-on-quarter; previously reported: +1.4% qoq). The acceleration in the second quarter was primarily driven by gains in consumer spending and fixed investment. According to data released by the Central Bureau of Statistics (CBS), the economy grew a lackluster 2.8% in the first half of the year, compared to the healthy 4.7% growth recorded in the second half of last year.
Looking at the domestic economy, private consumption expanded a strong 6.5% in the second quarter over the previous three months (Q1: -1.0%; previously reported: -1.7%). The healthy increase in private consumption was chiefly driven by an upswing in the purchase of durable goods. This pick-up benefitted significantly from a favorable base effect; Q1 saw a large drop in the purchase of durable goods following the implementation of an environmental tax on cars that came into effect at the start of the year. Fixed investment followed suit and also returned to expansionary territory (Q2: +5.2% SAAR; Q1: -6.1% SAAR, previously reported 5.6% SAAR), primarily supported by a solid pace of expansion in industrial investment in machinery and equipment. Residential investment contracted in the same quarter, countering efforts by Finance Minister Moshe Kahlon to reign in rising house prices by increasing the housing stock.
Regarding the external sector, imports recorded another weak quarterly performance and finished the first half of the year on weak footing (Q2: -1.1% SAAR; Q1: -9.1% SAAR), contradicting the robust private consumption data. Exports fared even more poorly, contracting 8.8% in the second quarter compared to the previous quarter’s 4.9% expansion. However, this is likely due to a sharp decline exports of polished diamonds and high-tech goods—products with a huge weight on exports.
In annual terms, GDP expanded 4.0% in Q2, which was up from the revised 3.7% expansion reported in the first quarter of the year (previously reported: +4.0% year-on-year).
Looking ahead, the economy is expected to continue expanding at a moderate pace. Domestic demand is likely to grow at a solid rate, supported by robust private consumption due to a tight labor market. Although deteriorating consumer confidence could dent private consumption, high business confidence should translate into healthy fixed investment growth. While the Central Bank expects the economy to reorient towards export-led growth, a recovery in imports could weigh on the external sector’s net contribution to growth.
Author: Jan Lammersen, Economist